A commentary on insurance coverage issues in Hawaii and beyond

December 07, 2016

We've been plugging away for nine years at this blog. We started in December 2007, 1047 posts ago. It has been both a challenge and an invaluable learning experience over the past nine years. Hopefully, our readers are kept informed on coverage developments, as well.

December 05, 2016

Bound by Pennsylvania law, the federal district court found there was no coverage for defects in the installation of a roof. State Farm Fire & Cas. Co. v. Kim's Asia Constr., 2016 U.S. Dist. LEXIS 138915 (E.D. Pa. Oct. 5, 2016).

Kim's Asia Construction contracted to remove and dispose of Powerline Imports, Inc.'s roof, and then install a new roof. After completion of the project, Powerline sued, alleging that Kim's Asia's negligent construction of the roof caused the roof to leak, even in minor rain storms. Kim's Asia made additional repairs, but the leaks continued. Powerline had to hire a new contractor to remove and dispose of the roof and install another roof. Powerline then sued Kim's Asia.

Kim's Asia sought defense and indemnification from State Farm under its comprehensive business liability policy. State Farm began defending Kim's Asia under a reservation of rights, but filed a complaint for a declaratory judgment that it had no duty to defend or indemnify. State Farm filed a Motion for Judgment on the Pleadings and/or Motion for Summary Judgment.

In Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A. 2d 999 (Pa. 2006), the Pennsylvania Supreme Court found that the key term in the dictionary definition of "accident" was "unexpected." This implied a degree of fortuity that was not present in a claim for faulty workmanship.

Here, the underlying complaint alleged that Kim's Asia "negligently installed a roof which leaks so badly that it cannot be repaired and needs to be completely replaced." The allegations related directly to Kim's Asia's allegedly poor construction of the roof it agreed to build, and therefore amounted to a claim for faulty workmanship.

The presence of the word "negligence" in the underlying complaint did not change the analysis. The key question was whether there was a causal nexus between the property damage and an occurrence, i.e., a fortuitous event. The underlying complaint did not allege anything "unexpected," "unintentional," or "fortuitous" about the damage to the roof. Nothing in the complaint suggested that Powerline's claim was anything other than a claim of faulty workmanship. Therefore, the events alleged in the underlying complaint did not qualify as an "occurrence" under the policy.

Therefore, State Farm's Motion for Judgment on the Pleadings and/or Motion for Summary Judgment was granted.

November 30, 2016

The court limited the number of deductibles to the counterclaims filed against the insured, not the more than 600 plaintiffs who were parties to the three underlying lawsuits. Probuilders Spec. Ins. Co. v. Yarbrough Plastering, 2016 U.S. Dist. LEXIS 134959 (E.D. Calif. Sept. 29, 2016).

Yarbrough entered into contracts with Lenox Homes to provide stucco and drywall services in the homes Lenox would build. Each contract required Yarbrough to indemnify Lenox for any claims resulting from property damage arising out of the performance of the contract.

To address the need to indemnify Lenox, Yarbrough obtained CGL policies from ProBuilders. Each policy required Yarbrough to pay a deductible - in the first year it was $4,000 and in subsequent years it was $10,000 - per "claim." The policies indicated that a claim "means a request or demand for money . . . because of . . . property damage . . . received by [ProBuilders] or an insured including services of suit . . . against an insured." Further, Yarbrough was required to pay a deductible for "each and every claim under this policy, irrespective of the number of claims which may be joined in any one suit . . ."

In 2009 and in 2013, in three separate lawsuits, approximatly 636 homeowners sued Lenox for various construction defects. Lenox cross-claimed against its subcontractors, including Yarbrough. Yarbrough tendered the defense of the lawsuits to ProBuilders. ProBuilders contributed $800,000 toward setting the claims brought by the homeowners against Lenox and obtained a dismissal from Lenox of the cross-complaints against Yarbrough.

ProBuilders required Yarbrough to pay a deductible - up to the amount incurred - for each home at issue in the lawsuits filed against Lenox. Though Yarbrough refused to pay 636 deductibles, it paid a full deductible on each of the three cross-complaints filed by Lenox. Cross-motions for summary judgment were filed.

ProBuilders argued that because Lenox sued Yarbrough, all of the claims in each of the underlying lawsuits were joined together, requiring Yarbrough to pay a deductible for each home. Yarbrough argued that the only claims made against it were those made by Lenox, i.e., the three cross-complaints.

The court agreed with Yarbrough. The policies anticipated claims for indemnity rather than direct claims of liability. In fact, the purpose of obtaining the policies was for possible demands for indemnity by Lenox rather than for poor workmanship, which was not covered. The fact that Lenox was subject to three lawsuits in which hundreds of claims were made did not change the fact that these hundreds of claims were never made on the Yarbrough policies.

November 28, 2016

The federal district court for the district of Hawaii rejected the insured's argument that the insurer acted in bad faith because the insured had to contribute to a settlement of the underlying case. Hanover Ins. Co. v. Anova Food, LLC, 2016 U.S. Dist. LEXIS 146114 (D. Haw. Oct. 21, 2016).

After a prior round of briefing, the court determined that Hanover had a duty to defend, but rejected Anova's claim for pre-tender fees. [prior post here].

After the underlying case settled with Hanover and Anova each contributing one half of the amount, Anova moved for summary judgment to establish that Hanover had acted in bad faith. Anova argued that Hanover acted in bad faith by refusing to pay for the entire settlement of the underlying lawsuit.

Florida law controlled. Under Florida law, an insurer had a duty to use the same degree of care and diligence as a person of ordinary care and prudence would exercise in the management of its own business.

Here, Hanover provided a defense to Anova. Hanover negotiated with Anova during attempts to settle the underlying lawsuit. Both Hanover and Anova agreed that each would contribute half of the amount to the settlement. The case did not settle in excess of Hanover's policies.

Anova did not present any evidence that it was "forced" to contribute to the settlement as a result of Hanover's bad faith. The patent infringement claims in the underlying suit were not covered by the policies. Therefore, it made sense for Anova to contribute to the settlement. Consequently, the motion for summary judgment was denied.

The developer constructed a condominium development in Chicago. The installation of the roof was contracted to Total Roofing. Total Roofing agreed to insure and indemnify the developer against liability for Total Roofing's work. Total Roofing obtained a CGL policy with Westfield Insurance Company listing the developer as an additional insured.

After it took possession, the Van Buren Condominium Association claimed construction defects in the roof caused water to infiltrate into the building and individual condominium units, causing damage to personal and other property in the units. When the developer refused to correct the roofing problems, the Association spent $309,000 for repairs.

The Association then sued the developer and Total Roofing. The developer notified Westfield and tendered the defense. Westfield denied the tender, but defended Total Roofing under a reservation of rights. Westfield filed an action for declaratory judgment against the developer for a determination that there was no duty to defend or indemnify. The developer filed a counterclaim alleging a duty to defend because the underlying complaint contained allegations of personal property damage that were within the policy's coverage.

The parties cross-moved for summary judgment. At the hearing Westfield acknowledged the underlying complaint alleged personal property damage but argued the Association lacked standing to assert such claims on behalf of individual unit owners. The trial court granted summary judgment to the developer, but on a motion for reconsideration, the court vacated its judgment and granted summary judgment to Westfield.

On appeal, the judgment was affirmed. First, the underlying complaint either focused on the intentional bad acts of the developer or nonfortuitous events. Such events included the resulting damage to the condo building due to shoddy workmanship, of which the developer was allegedly aware.

Second, the allegations did not constitute property damage under the policy. Under Illinois law, "physical" injury occurred when property was altered in appearance, shape, color, or in other ways that did not take place when an economic injury occurred, such as diminution in value. The complaint alleged that had the unit owners known of the defects, they would not have purchased the units or would have negotiated the price. Therefore, these damages and the allegations related only to diminished value and economic harm. Defective work and products were purely economic losses.

Third, while construction defects that damage something other than the project itself could constitute an occurrence and property damage, the allegations of damage to personal property were meant to bolster the contention that water infiltration generally occurred and caused damages. Moreover, the Association's allegations of personal property damage were not offered for the purposes of recovery. These allegations were purely tangential to the Association's claim for damages for repair and remediation of the roof.

Having determined there was not duty to defend, the court also affirmed the trial court's ruling that there was no duty to indemnify.

After the condominium project was completed, Hurricane Wilma damaged several roofs in the development. The association and its insurer, Empire Indemnity Insurance Company, discovered that the roof had been installed incorrectly by Patnode Roofing, Inc. Empire paid for the damages and the association assigned its claims against Core Construction and its subcontractors, including Patnode, to Empire. Empire then sued Core Construction, Patnode and other subcontractors.

Core Construction was a named insured under a CGL policy issued by Crum & Forster to Patnode. Core Construction requested a defense, but Crum & Forster rejected the request. In a coverage suit, the district court granted summary judgment to Crum & Forster because the underlying suit did not allege that Patnode's work resulted in "property damage" as defined in the policy. The complaint only asserted that the roofs had been damaged, rather than asserting that the roofs had caused damage to other elements of the building.

The Eleventh Circuit acknowledged that the Florida Supreme Court had concluded that "property damage" involves "damage beyond the faulty workmanship or defective work." But there was "no coverage for 'property damage' when a claim sought solely the costs of repairing and replacing the actual defects in . . . construction." United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871, 889 (Fla. 2008).

Here, Crum & Forster owed no duty to defend because the complaint did not allege a claim for "property damage." Empire did not allege that the defective installation of roofing caused "physical injury to tangible property" such that there was damage to the completed project caused by the subcontractor's defective roofing work or that the defective work caused the roof to fail in such a way as to allow the elements to damage other components of the project. The complaint against Core Construction only alleged a claim for the cost of repairing and replacing a roof that had been installed improperly by its subcontractor.

November 16, 2016

Interpreting Florida law, the United States District Court found there was no duty to defend a contractor against construction defect claims. Evanston Ins. Co. v. Dimmucci Dev. Corp. of Ponce Inlet, Inc., 2016 U.S. Dist. LEXIS 123678 (M.D. Fla. Sept 13, 2016).

The insured built condominiums and townhomes. It held three successive CGL policies issued by Evanston. The "your work" exclusion in the policies barred coverage as follows:

"Property Damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard."

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

The insured constructed the Towers Grande Condominium. In 2012 the Towers Grande Condominium Association, Inc. initiated the underlying action alleging that the insured's failure to construct the Towers Grande properly resulted in building defects and deficiencies. Damage to the roof, generator exhaust pipe, and HVAC system was alleged. Further, water intrusion and decking/structural issues were claimed. In addition to the construction defects, the Association also alleged that the insured's faulty work led to additional damages.

The court initially determined that the underlying complaint alleged an occurrence under the policies. The insured did not expect nor intend the resulting structural damages caused by water intrusion and improper ground floor decking.

The complaint also sufficiently alleged "property damage." The complaint alleged damages for more than the cost of repairing or replacing the insured's defective work. For example, the complaint alleged "failure of waterproofing, sloping and/or joint issues with sealant allowing water into units and structural damage to decking and rebar below." Such allegations did not solely encompass the insured's defective work but also described other property damaged, such as damage caused by the insured's faulty work in applying waterproofing and sealant. Because the underlying complaint alleged property damage to nondefective portions of the project caused by the insured's defective work, and were not limited to repair or replacement of such work, the allegations sufficiently established an "occurrence" that caused "property damage," thus triggering a duty to defend.

However, the allegations also brought the alleged property damage within the "your work" exclusion, ultimately extinguishing the insurer's duty to defend. If the complaint alleged damage only to the insured's work, the "your work" exclusion barred coverage. The complaint alleged that the insured's defective work on a portion of the Towers Grande caused property damage to other portions of the building also constructed by the insured.

Interestingly, the court's reasoning departed from that of the New Jersey Supreme Court and other jurisdictions. In Cypress Point Condominium Assoc. Inc. v. Adria Towers, 226 N.J. 403 (N.J. 2016) [post here], the New Jersey Supreme Court recognized the subcontractor's exception to the exclusion and held that because the water damage to the completed portions of the project were alleged to have arisen out of faulty workmanship performed by subcontractors, it was a covered loss.

November 14, 2016

The Louisiana Supreme Court held that the duty to defend in long latency disease cases should be prorated between the insurer and insured when the policies cover for only a portion of the time in which the exposure occurred. Arceneaux v. Amstar Corp., 2016 La. LEXIS 1675 (La. Sept. 7, 2016).

The underlying plaintiffs alleged that they worked at American Sugar's refinery during various years ranging from 1941 to 2006, and suffered hearing losses from exposure to loud noise in the course of their work. For many of these years, American Sugar was self-insured. For other years, various insurers provided policies. Continental Casualty Company provided liability policies to American Sugar covering bodily injury from December 31, 1975 through March 1, 1978, or a period of 26 months. Continental agreed to pay 25% of the past and future defense costs, subject to a reservation of rights.

In the ensuing lawsuit, American Sugar moved for partial summary judgment, contending that Continental owed a duty to defend, including a complete defense and reimbursement of defense costs expended plus interest. The trial court granted American Sugar's request for a complete defense going forward, but denied the motion's request for past defense costs.

The Supreme Court noted there was no Louisiana precedent on whether an insurer's duty to defend may be prorated among insurers and the insured during periods of self-insurance in long latency disease cases. Nationwide, the pro rata allocation method and the joint and several allocation method were used.

Under the pro rata allocation, carriers of triggered policies were responsible for a share of defense costs based at least in part on the period of time they were on the risk. Defense costs were divided among insurers, and if the insured was not covered for certain periods, the insured was responsible for its pro rata share. Under the joint and several allocation, the insured selected one insurer that was on the risk and held it liable for the entire loss up to policy limits. This insurer then had the burden of collecting contribution from other insurers.

The court adopted the pro rata allocation method for defense costs based on the policy language. The joint and several allocation approach provided a disincentive to insureds to purchase uninterrupted insurance coverage and provided a windfall to companies that failed to obtain continuous coverage. The pro rata allocation method, by contrast, promoted risk spreading.

Therefore, the amount of time an insurer was on the risk was an appropriate formula for pro rata allocation. Continental was only responsible for its pro rata share of defense costs based on its policy periods. A petition for rehearing was denied by the Louisiana Supreme Court on October 19, 2016.

Hurricane Sandy caused flooding which damaged two of Amtrak's tunnels under the East and Hudson Rivers. Seawater from the flooding caused extensive damage to equipment in the tunnels. The district court granted summary judgment to the insurers on the following issues: (1) the damage caused by an inundation of water in the tunnels was subject to the policies' $125 million flood sublimit; and (2) the corrosion of equipment after Amtrak pumped out the seawater was not an "ensuing loss" and therefore was also subject to the flood sublimit.

Various policies offered different definitions of "flood." Some of the policies did not include within the definition of flood "sea surge" and "wind driven water." Therefore, Amtrak argued the wind-driven tidal surge did not fall within the definition. The court disagreed. The policies' definitions of "flood" were sufficiently broad to include an inundation of seawater driven by storm surge or a wind storm under their plain meaning. Consequently, the $125 million flood sublimit applied.

The ensuing loss clause provided that: "Even if the peril of flood . . . is the predominant cause of loss or damage, any ensuing loss or damage not otherwise excluded herein shall not be subject to any sublimits." The court noted that coverage for an ensuing loss directly related to the original excluded risk was not allowed. Amtrak contended that the corrosion of its metal equipment was caused by a "chloride attack" arising from the combination of seawater residue with oxygen in the air, and thus an "ensuing loss" that was not subject to the flood sublimit. The corrosion began only after Amtrak pumped the seawater out of the tunnels. The court found Amtrak's interpretation of the ensuing loss clause so broad that it would contravene the flood sublimit's purpose. Therefore, damage due to the corrosion was also subject to the $125 million flood sublimit.

November 07, 2016

The court denied the insurer's motion for summary judgment seeking to establish it did not breach the policy when denying coverage for the collapse of basement walls. Belz v. Peerless Ins. Co., 2016 U.S. Dist. LEXIS 118900 (D. Conn. Sept. 2, 2016).

The Belzes purchased their home in 2001. Prior to the purchase, they were aware of notable cracking in the basement walls. An engineer was hired to inspect the cracking and determined the cracks did not threaten the structural integrity of the home.

In 2007, the Belzes installed "brightwall" panels in their basement to cover the cracks. There was no photographic evidence, but the Belzes insisted that the cracks were no more severe in 2007 than they were in 2001 when the home was purchased. The brightwall was removed in April 2013. At this point, the Belzes discovered that the cracking had progressed substantially. The cracks were large enough to put one's finger through the wall.

The Belzes filed a claim under their homeowners' policy with Peerless. Under the policy, Peerless agreed to insure for "collapse of a building or any part of a building" caused by, among other things, "hidden decay." The term "collapse" was not defined in the policy. The collapse provision excluded the collapse of foundations and retaining walls "unless the loss is a direct result of the collapse of a building."

Peerless denied the claim, citing the exclusions for "poor workmanship and materials used." The Belzes filed suit. Peerless filed a motion to dismiss which was denied [post on the court's ruling on the motion to dismiss is here].

Peerless now moved for summary judgment, arguing that the cracking in the basement walls constituted a "loss to a foundation or retaining wall." Peerless also contended that the Belzes were aware of the cracking in 2001, well before the commencement of the policy.

The court had previously determined on the motion to dismiss that the terms "foundation" and "retaining wall" were ambiguous. Following the law of the case doctrine, the court again found on the motion for summary judgment that the terms were ambiguous and subject to multiple reasonable interpretations. Accordingly, the terms would be construed against Peerless. The Belzes' basement wall would not be considered part of the property's "foundation" or "retaining wall" for purposes of insurance coverage. Therefore, the cracking damage to the basement walls was not categorically excluded from coverage under the policy terms covering foundations and retaining walls. The question of whether the cracking actually resulted from "hidden decay" was a disputed question of fact left for the trier of fact.

There was also a material dispute as to whether the damage amounted to a collapse under the policy. Under Connecticut law, a "collapse" for home insurance purposes included "substantial impairment to the structural integrity of a building."

The court next considered whether the claim was timely reported. Other than the testimony of the inspecting engineers and the Belzes, there was no photographic or other evidence to show the condition of the basement walls before 2013. Instead, there was a disputed issue of fact as to when the collapse of the basement walls took place. Accordingly, Peerless had not met its burden with respect to the timing of the collapse.

Finally, there was a genuine factual dispute as to whether Peerless denied the Belzes' claim in bad faith. Deposition testimony suggested that it was Peerless' practice not to apply the "collapse" provision of the policy where the impacted structure was still standing, despite the long-standing principle under Connecticut case law that a collapse could be found even where a structure was still standing if the structural integrity was compromised.